Several months after the collapse of London Capital & Finance, the FCA sends a “Dear CEO” letter focusing on financial promotion of products like mini-bonds to retail clients.
The UK Financial Conduct Authority (FCA) has sent another “Dear CEO” letter dedicated to the topic of financial promotions – this time, the focus apparently falls on promotions of products like mini-bonds. Although the regulator does not mention London Capital & Finance in the letter, one might guess that the content of the letter and the clear stress put on promotions of mini-bonds have been influenced by LC&F’s collapse and the public pressure to investigate the issue.
This is the second “Dear CEO” letter dedicated to the topic of financial promotions that the FCA has sent this year. On January 9, 2019, the FCA published a letter addressed to the CEOs of all firms it regulates to remind them of their responsibilities relating to the use of financial promotions. In that letter, the FCA reminded firms that, before they approve a financial promotion for communication by an unauthorised person, they must confirm that it complies with the FCA rules on financial promotions. An example would be an FCA-authorised firm approving the financial promotions of mini-bonds, a type of retail investment product which can be issued by firms that the FCA does not regulate.
Despite the FCA’s letter of January 9, 2019, the regulator has identified a number of examples where it appears the due diligence carried out on a financial promotion may have fallen well short of the standard it expects.
Even when investment products are not regulated or are issued by companies that are not FCA-authorised, should a firm provide a ‘s21 approval’ of their promotion, it can expect the FCA to require the firm to demonstrate that it has carried out such due diligence to ensure that the promotion is fair, clear and not misleading.
Direct offer financial promotion of mini-bonds and other unlisted securities to retail clients is generally restricted to high net worth investors, sophisticated investors or “restricted investors” (who have certified that they are not investing more than 10% of their net assets in non-readily realisable securities), the FCA explains. It is the responsibility of the firm that communicates or approves the direct offer financial promotion to ensure that this restriction and the rules on appropriateness of the investment are complied with.
Finally, the FCA warns that in cases where it observes non-compliance with its requirements by firms which approved promotions it will take action. The regulator notes that it has a range of measures it can take which can result in the amendment or removal of financial promotions, the suspension or cancellation of planned issuance of these products to investors, formal limitations being placed on the activities of the firms which approved non-compliant promotion and the FCA bringing civil or criminal proceedings.
The marketing and promotion of mini-bonds, such as those sold by LCF, are already subject to financial promotion restrictions outlined in the Financial Services and Markets Act 2000. In the UK, responsibility for regulating the promotion and marketing of mini-bonds lies with the FCA, and firms that fail to meet any of the relevant requirements may be subject to enforcement action. Whilst the promotional material is regulated by the FCA, the product itself – mini-bonds – are unregulated.